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Press Release: IMF Concludes Article IV Mission to Montenegro

May 20, 2013

Press Release No. 13/183
May 20, 2013

A staff team from the International Monetary Fund (IMF) visited Podgorica during May 9-20 to hold discussions on the annual review of Montenegro’s economy or 2013 Article IV Consultation. The team met with Prime Minister, Milo Djukanovic, Finance Minister, Radoje Zugic, and Governor of the Central Bank, Milojica Dakic, as well as other public officials and representatives of parliament, the business community, labor unions, and international partners. At the end of the visit Mr. Ilahi, the IMF mission chief for Montenegro, made the following statement:

“The economy is expected to rebound in 2013 from last year’s recession, but problems in the metals sector, debt overhang in the private sector, and the weak external environment would limit economic growth to between 1-2 percent.

“The rapid increase in public debt since 2008 is a significant risk, as exhausted fiscal buffers and increasingly large rollover needs leave Montenegro vulnerable to shifts in market conditions. The government has made progress in reining in the fiscal deficit, which should help to moderate the pace of debt accumulation this year, but more needs to be done to tackle the key structural factors underlying large fiscal deficits. The high public indebtedness and rollover needs also limit scope to take on additional debt to finance large infrastructure investment.

“A sustained, multi-year fiscal consolidation effort is required to reduce the public debt burden to 30 percent of GDP in 10 years, a target the mission deems appropriate. To facilitate meeting the authorities’ 2013 fiscal deficit target, the mission encourages the prompt adoption of the increase in the VAT rate from 17 to 19 percent, currently under consideration. It also advises the authorities to extend the fiscal measures adopted this year to 2014 and beyond, and identify specific revenue and expenditure measures to achieve the medium term debt target.

“Banking system downsizing in the aftermath of the collapse of the lending boom has progressed well, though rising non-performing loans and continued private sector balance sheet impairment remain a concern. Steps should be taken to remove the structural distortions that hinder the cleanup of bank and private sector balance sheets, including lengthy court procedures that delay collateral execution.

“Interventions to support the aluminum company (KAP) have failed to put it on a sustainable footing, and have contributed to misallocation of scarce resources, the need for budgetary subsidies and rising contingent debt, though more recent downsizing of the company has helped reduce fiscal burden and is welcome. Budgetary support for the company should be discontinued and steps should be initiated toward orderly liquidation under a clear and time-bound plan.

“Montenegro has significant untapped potential in tourism and energy, but weaknesses in the business environment that deter investors need to continue to be addressed. As a small open economy without an exchange rate instrument to mitigate shocks, it is also essential that collective bargaining framework is improved in a manner that meaningfully addresses high structural unemployment and ensures changes in wages are commensurate with those in productivity.”